OCTOBER 2005
Pennsylvania Real Estate
New Developments in Pennsylvania’s Local Transfer Taxes
New Pennsylvania Law Requires Local Ordinances to Fully Conform to State Transfer Tax Requirements;
Allows the Pennsylvania Department of Revenue to Enforce Local Real Property Transfer Taxes; Exposes
Taxpayers to Increased Liabilities for Alleged Underpayments of Local Transfer Taxes; and Clarifies that
Most, But Not All, Local Transfer Taxes Are Subject to a One Percent Rate Limitation
On July 7, 2005, Pennsylvania’s Governor, Ed
Rendell, signed Act 40 into law, amending provisions
of the Tax Reform Code of 1971 which governs the
imposition, enforcement and collection of local real
estate transfer taxes in Pennsylvania. Act 40 is
intended to make the enforcement and collection of
local transfer taxes more effective by allowing local
taxing authorities to delegate collection
responsibilities to the Department of Revenue;
increasing the statute of limitations with regard to the
collection of local taxes; synchronizing the
requirements of local ordinances and state transfer tax
laws; and clarifying the application of a 1% aggregate
rate limitation to local transfer taxes, which are not
assessed in home rule municipalities. The transfer tax
provisions of Act 40 will take effect and apply to any
document executed or presented for recording on or
after October 5, 2005.
BACKGROUND
In addition to a 1% real estate transfer tax imposed by
the Commonwealth of Pennsylvania, Pennsylvania
law also allows cities, boroughs, towns, townships and
school districts to impose local transfer taxes.
Typically, all transfer taxes levied by local taxing
authorities may not exceed an additional 1%
aggregate levy. However, certain home rule
municipalities are permitted to levy higher transfer
taxes, including Philadelphia (3%), Pittsburgh (3%),
and Scranton (2.7%). Transfer taxes are imposed in
Pennsylvania upon the recording of deeds transferring
title to property; the execution of certain long-term
leases; and the transfer of ownership interests in
certain real estate companies and family farm
corporations. Both state and local transfer taxes are
collected by County Recorders of Deeds, who remit
payments to the Commonwealth or the appropriate
local taxing authorities.
Since 1986, the power of local taxing authorities to
levy transfer taxes generally has been limited to
transactions subject to tax by the Commonwealth. To
the extent local transfer taxes were imposed upon
“additional classes or types of transactions” prior to
1986, local governments have been permitted to
continue collecting taxes on transactions not subject
to state tax.
Historically, the split of local collection and
enforcement responsibilities between Recorders of
Deeds and local taxing authorities, the creation of
overlapping enforcement jurisdictions between
municipalities and school districts, and uncertainty
regarding differences between state and local taxing
practices typically have resulted in weak and poorly
coordinated efforts to recover underpayments of local
transfer taxes. Although the Department of Revenue
has been reasonably aggressive in identifying and
pursuing claims for the nonpayment or alleged
underpayment of transfer taxes, the Department has
been reluctant to become involved in local collection
efforts because of potential differences in state and
local taxing practices and concerns regarding the
legality of sharing tax information with local
governments. As a result, the recovery of tax
underpayments by the Commonwealth has not been
accompanied by comparable recoveries by local
governments.
Act 40 is intended to authorize (but not mandate) the
Department of Revenue to coordinate a unified
transfer tax collection program to remedy these
problems. When a local taxing authority delegates
collection responsibilities to the Department, the
Department may retain 10% of all amounts collected
as compensation for its collection efforts. Other
informal methods of state and local cooperation are
also authorized by the legislation in the form of the
sharing of information regarding tax collection
activities. To facilitate state and local cooperation,
the legislation provides a significant benefit to
taxpayers by eliminating nonuniform local transfer
tax collection practices by all local taxing authorities,
except for the City of Philadelphia.
ENHANCED ENFORCEMENT POWERS
In an attempt to enhance the enforcement and
collection of local transfer taxes, the legislation has
increased the statute of limitations afforded to local
taxing authorities in several situations. Prior to the
enactment of Act 40, local taxing authorities were
authorized to make a determination of additional tax
and interest due by any person failing to pay a local
transfer tax only within three years after the document
conveying the applicable interest in real property was
recorded. Furthermore, only in limited situations
involving fraud were local taxing authorities afforded
an unlimited statute of limitations for the collection of
delinquent taxes. However, pursuant to the enhanced
enforcement procedures enacted under Act 40, in
addition to cases of fraud, local taxing authorities are
afforded an unlimited statute of limitations with
respect to any case involving an “undisclosed,
intentional disregard of rules and regulations.”
Therefore, under the new law, local taxing authorities
are afforded an unlimited statute of limitations in a
much broader array of situations. Act 40 also allows
for a six-year statute of limitations in cases where
taxpayers underpay local transfer taxes by 25% or
more.
2 OCTOBER 2005
In addition to exposing taxpayers to more vigorous
enforcement powers, by allowing for the coordination
of state and local enforcement activities, Act 40 also
may expose taxpayers to more frequent demands to
pay taxes based on “computed values” (i.e., the
assessed value divided by the common level ratio)
when significant differences exist between stated
consideration and computed values. This may be true
especially where real property is transferred with other
business assets and the consideration reported is a
result of allocations of the purchase price, which may
not be set forth in a separate sales agreement.
CONFORMITY BETWEEN STATE AND LOCAL
REGULATIONS
The “grandfather clause” allowing local taxing
authorities to continue pre-1986 practices with respect
to the taxation of “additional classes or types of
transactions” not subject to tax under state law has
created uncertainty regarding the extent to which
transactions are subject to local transfer taxes. For
example, although the Department of Revenue
promulgated regulations in 1988 codifying a
previously recognized “turnkey exception” from
transfer tax, some local taxing jurisdictions have
questioned whether they are required to recognize the
exception. Pursuant to this regulation, no state
transfer tax is assessed on either end of a transaction in
which a property owner transfers real estate to a
contractor or developer who is contractually required
to reconvey the property to the original owner after
developing or constructing improvements upon the
property. While it is questionable whether any local
taxing authorities expressly provided for the taxation
of turnkey transactions prior to 1986, disputes about
the scope of transactions taxed under pre-1986
ordinances have allowed local taxing authorities to
argue that they have the authority to tax transactions
like the turnkey transaction even though the state
does not tax such transactions.
Act 40 addresses the problem of the lack of uniformity
between state and local taxing powers by repealing
the grandfather clause allowing for the taxation of
additional “classes or types of transactions” by local
governments. While it is possible that some local
taxing authorities may attempt to continue to argue
KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP
that they possess greater taxing authority under the
“tax anything” powers granted by the Local Tax
Enabling Act, the validity of such claims certainly will
be subject to challenge. To minimize surprises,
however, prudent property owners and their counsel
should continue to consult both state and local
transfer tax laws when analyzing whether a specific
transaction is exempt from both state and local transfer
taxes. In the event local taxing authorities attempt to
continue taxing transactions exempt under state law
and regulations, the discrepancy should be disclosed
in statements of value or other written
communications to avoid potential allegations
concerning any alleged “undisclosed, intentional
disregard of rules and regulations” that may trigger an
extended statute of limitations and increased
penalties.
IMPACT OF ACT 40 ON HOME RULE TRANSFER
TAX RATES
The inclusion of a previously omitted cross-reference
from state law by Act 40 and the history of the
legislation have generated some uncertainty and
controversy regarding the applicability of the 1%
aggregate local transfer tax limit to home rule
municipalities.
Generally, the Local Tax Enabling Act imposes a 1%
limit on the aggregate amount of local transfer taxes
imposed by local taxing authorities. Home Rule
Charter legislation, however, generally exempts home
rule municipalities from tax rate limitations imposed
by the Local Tax Enabling Act, except with respect to
the taxation of the income of nonresidents. However,
in 1986, when the General Assembly generally
required local transfer taxes to be collected pursuant
to state law, it created confusion by referencing certain
limitations on the total amount of revenue collected
by local taxing authorities, but by failing to expressly
cross-reference the law imposing the 1% rate
limitation. Because Act 40 corrects this oversight,
some commentators have suggested the intent is to
subject all local transfer taxes, including those in
home rule municipalities, to the 1% aggregate rate
limit.
3 OCTOBER 2005
The confusion regarding the impact of supplying the
previously omitted cross-reference to the 1% rate limit
was exacerbated by the legislative history of Act 40.
When the original version of the legislation was
introduced, it contained a provision excepting “a city
of the second class which is a home rule municipality”
from the combined maximum tax rate requirement.
Pittsburgh is the only such municipality within the
state. When other home rule municipalities requested
the inclusion of similar language in the legislation,
these provisions were removed purportedly as
unnecessary because of the express provisions of
Home Rule Charter Laws allowing higher tax rates.
The legislative history in this regard, unfortunately, is
less than clear.
However, due to the fact that the legislation did not
expressly modify or repeal provisions of other laws
exempting home rule municipalities from tax rate
limitations and given the prior judicial precedent
upholding such exemptions for home rule
governments, claims that the legislation limits all
local transfer taxes, including those of home rule
municipalities, to a 1% aggregate rate limit may face
substantial legal challenges.
Blaine A. Lamperski
412.355.8309
blamperski@klng.com
Raymond P. Pepe
717.231.5988
rpepe@klng.com
Lisa R. Geisel
412.355.6339
lgeisel@klng.com
Steven J. Adelkoff
412.355.6325
sadelkoff@klng.com
KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP
FOR MORE INFORMA
TION on this Alert or other Pennsylvania real estate tax issues, please feel free to contact one
INFORMATION
of the Kirkpatrick & Lockhart Nicholson Graham LLP lawyers listed below:
Pittsburgh
Steven J. Adelkoff
412.355.6325
sadelkoff@klng.com
David H. Ehrenwerth
412.355.6532
dehrenwerth@klng.com
Blaine A. Lamperski
412.355.8309
blamperski@klng.com
David J. Lehman
412.355.6738
dlehman@klng.com
Raymond P. Pepe
717.231.5988
rpepe@klng.com
Pierce Richardson
412.355.6786
prichardson@klng.com
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